Taxing Indiana—2004 Returns Reveal Much about Our Relative Wealth

Each year, the dawn of spring coincides with the arrival of one of life's
inevitabilities. As the procrastinators among us scurry to complete their
1040As and IT-40s for the 2005 tax year, let us take a look at the data
gleaned from the 2004 taxes we filed last year.

Indiana Returns

Over 2.89 million Indiana income tax returns were filed for 2004. This
is 56,981 more returns than the prior year, a 2 percent increase, according
to the Indiana Department of Revenue.Figure 1 shows the distribution of returns according to their federal
adjusted gross income (AGI) bracket. Combined, the AGI for all Hoosiers
exceeded $126.5 billion. With almost a quarter of all returns, the $10,000
or less bracket was clearly the largest (706,893 returns). That category
was the largest in each of the 92 counties, ranging from 17 percent of
all Hamilton County returns to nearly 29 percent of all Knox County returns.

Figure 1: Indiana Tax Returns, 2004

The second-largest category in the vast majority of counties was the
$10,001 to $20,000 bracket. For 17 suburban counties, the second-largest
category was the $50,001 to $75,000 range. Hamilton County stood alone
with its second-largest number of returns being those in the $100,000
to $250,000 range.

There were 2,891 returns with an AGI over $1 million for 2004, a 48.8
percent increase over the previous year. However, these high-dollar returns
still account for a mere fraction of the total; Hamilton and Boone counties
led the state at just 0.4 percent. Hoosier millionaires were found in
all but eight counties, although they were, not surprisingly, concentrated
in the state's metro areas

Median Adjusted
Gross Income

Indiana's median adjusted gross income was $23,372 in 2004. This
means that half of income tax returns reported AGIs above this number,
while the other half were below it. At the county level, the median AGI
ranged from $19,134 in Orange County to $44,512 in Hamilton County.

Indiana experienced a five-year growth of 9.7 percent ($2,062) from
its median AGI of $21,310 back in 1999. Local growth rates ranged from
28.2 percent in Gibson County to a measly 0.5 percent in Steuben County.

However, if one adjusts the 1999 values for inflation, the picture
is not so pleasant. When taking inflation into account, Indiana saw the
purchasing power of its median AGI drop 3.3 percent. Only 21 counties,
virtually all in southern Indiana, saw median AGI increase in real terms
between 1999 and 2004 (see Figure 2). Gibson, Pike, Vermillion and Boone
counties led the way, with inflation-adjusted AGI growth topping 5 percent.
Fifteen of these 21 counties had been below the 1999 Indiana median,
so they had lost ground to make up. Yet even with the gains made between
1999 and 2004, 12 of the 21 were still below the Indiana median. Gibson
County, on the other hand, experienced the most dramatic growth in median
AGI, jumping a remarkable 44 spots, from a rank of 74th in 1999 to a
rank of 30th in 2004.

Figure 2: Median Adjusted Gross Income, 2004

Major Deductions on Indiana Tax Returns

Over 70 percent of returns claimed one Indiana deduction or another,
with total deductions close to $7.7 billion. That equates to an average
total deduction around $3,750 per return. While a plethora of deductions
are there for the claiming, the following four deductions, as seen in
Figure 3, account for over 82 percent of all Indiana deductions in dollar
terms.

Figure 3: Major Indiana Deductions, 2004

Homeowner and Renter Deductions: Since everyone needs a place to live,
it is not surprising that the most common were the residential homeowner
property tax deduction, claimed on over 1.3 million returns, and the
renter deduction, found on over 624,000 returns. Both of these deductions
are capped at $2,500 per return; the average amount deducted for the
residential property tax deduction was $1,197 per return, while that
amount increased to $2,296 for the renter deduction. Together, these
two deductions ($1.6 billion and $1.4 billion, respectively) account
for about 40 percent of the value of all Indiana's deductions.

Social Security: Indiana does not tax social security benefits, so
that income gets deducted from federal AGI as well. While a smaller number
of returns (not quite 234,000) claim this deduction, the total value
of that deduction is nearly $2.1 billion—making it Indiana's
single largest, at 27 percent of all deductions. The average deductible
amount was $8,957 per return.

Interest on Government Obligations: Not many people have interest on
government obligations to deduct, but the total value of those deductions
exceeds $1.2 billion, accounting for about 16 percent of all Indiana
deductions. For the roughly 104,000 returns deducting the interest on
U.S. savings bonds and the like, the average value of the deduction was
almost $12,000.

Withholding Works

The vast majority of taxpayers (more than 70 percent) overpaid their
Indiana income taxes in 2004 and received a refund; the average refund
was $230. For those Hoosiers who owed taxes, the average amount owed
was $522. Jennings County had the largest percentage of filers (75 percent)
receiving a refund, while Clark County had the largest percentage of
filers (35 percent) owing money to the state. All told, the 2004 Indiana
individual income tax brought in $3.81 billion of revenue to finance
Indiana government and services.

Rachel Justis, Managing Editor
Indiana Business Research Center,
Kelley School of Business, Indiana University